Dropbox, Inc. (DBX) Earnings Call Transcript & Summary

Okay. Now that's great to hear. And I just wanted to touch on some go-to-market strategy for a minute here. How do you think about the partnerships that you have out there or building with the freelancer communities as part of this partner initiative?

Yes. Certainly, we continue to invest in our partnerships. A few stats, maybe. Basic users are 2.5x more likely to convert to paid if they adopt our ecosystem apps, and our paid teams that are active with our integration spend 35% more money with Dropbox. So clearly very important for us. One example on how we're investing in partnerships and how we're serving our freelancer and creative users is with Adobe, where now with our latest product integration, a creative user can leverage Dropbox, transfer directly within Photoshop to easily and securely deliver files to clients. Then another good example of Zoom, where Zoom launched their App Marketplace in July, and Dropbox Spaces was featured in the new Zoom App Marketplace, where the app is a surface that does link Zoom and Dropbox. And now when customers are on a Zoom call, the Spaces app provides a collaborative workspace to take notes, attach files and track action items during a meeting. So we're in the early innings here and excited to iterate on that experience, but ultimately and certainly expanding our capabilities and our opportunities through these partnerships.

Okay. No, that's great to hear. We're trying to get some questions rolling in, but I just want to touch on one area real quick before jumping in there. Just turning to ARR metrics a little bit. How should we think about the puts and takes there of some of the net new per-user metrics than just general ARPU? How does some of the newer packaging that you've rolled out like Family plans impact this dynamic? And I guess, how do you kind of think about the levers that you can pull to kind of focus more on ARR growth going forward?

Yes. Great question. ARR is our primary metric, is focusing on driving errors how we actually operate our business, and it's less impacted by short-term trends. And I think that what we're seeing this year in paying users and ARPU really illustrates why we focus on ARR as opposed to these price and quantity metrics, specifically with the Family plan. This plan includes 6 licenses for friends and Family for roughly $20 a month. So that's a tailwind to paying users but a headwind to ARPU. And then conversely, as part of our strategy this year, we're no longer pursuing large paying user deals that carry low ASPs, which is a headwind to paying users but a tailwind to ARPU. So at times, we have these competing dynamics between these 2 metrics, which, again, that's why we primarily focus on ARR, where, on a constant currency basis, we reported last week that we added $54 million in net new ARR in Q2, and that's a sequential increase after normalizing for the DocSend acquisition, so up from Q1, and Q1 was actually up from Q4. So Timothy and his team are doing a really nice job here. And some of the key drivers of that increase, again, we talked about improved retention across our SKUs due in part to some of those improvements we talked about in our mobile experience; strengthen our Professional SKU, which was up 30% year-over-year; the continued performance from HelloSign and DocSend; adoption of our Family plan and optimizations that we've made to our self-serve onboarding process. So a lot of things going well that Timothy and his team are driving.

Okay. That's great to hear. And I guess just kind of on that point, we had a question come in, in dynamics. And there has been nice growth in ARPU here. How do you decide when and how to raise prices? And how do you think about the long-term pricing power that is in the core Dropbox business?

Sure. So yes, pricing is certainly one of the tools we can use. We saw in 2019 and 2020 when we rolled out a price increase across our Plus SKU that users will stay with us through a price increase. We saw stable churn, stable retention despite that price increase. So it's definitely -- we have that pricing power. Now we want to do it thoughtfully, and we tend to only do a price increase when we've added sufficient value to our products. And so this is something we stay very close to and pay a lot of attention to, to make sure that if we do raise prices that, again, customers will stay with us. So this is not something we're planning this year. It's not factored into our guidance, but I think this is one of the levers we can pull at the appropriate times. And this is where we assess, again, that we added enough value. Will the market accept it? Will we do testing when it comes time to raise prices? And this is something we'll consider in the future but not a major component of this year's guidance.

Okay. I guess maybe similarly, how do you think about the mix of -- or managing the packaging of solutions as part of this and either rolling out a new plan or adjusting some of the one that's there before you end up in a paywall or have to raise up to the next year?

Sure. I think this is one of the fun parts about this diverse product portfolio we're creating, whether it's our own SKUs that we're developing or whether it's DocSend, it's HelloSign. And so we're trying to figure out the right pricing and packaging as we pull these together or keep them separate. We talked about earlier this bundled Pro Plus HelloSign SKU that we're introducing. And so we're trying to make that a more seamless experience for our customers really as received pockets of freelancers, and we figure out tools that may best serve their needs, That's when we'll introduce these pricing and packaging changes. So I think this is one of the interesting challenges that we're facing. It's figuring out the right permutations of our SKU set. Perhaps for those that are interested in what they are today, at the back of our investor deck, which is on our website, we have the list of Dropbox SKUs, the list of HelloSign SKUs and DocSend SKUs. So you can see how they operate on a stand-alone basis. And again, this is what Drew and Timothy and I are -- and, obviously, our teams are constantly looking at to figure out how do we price, how do we package all these components in the most compelling way. And then once we make a -- develop a hypothesis, if you will, we certainly do a lot of testing to see if it's resonating with our customers and, of course, reiterate based on that testing. So this is a fun challenge that we're up against as we develop this diverse product portfolio.

No. It sounds like it and definitely a point that we'll be paying attention to going forward there. I had another question come in. You mentioned that you're seeing a change to hybrid might be as strong as the change to mobile. I guess where is this kind of commentary coming from? What is the opportunity that you see here? And what's the biggest change in the behavior that you're seeing out there?

Sure. I think really what we're seeing is that people are going to constantly need software to help them with distributed work, and it's not just through COVID, right? People after COVID are going to need collaboration tools because a lot of folks are not going back to work full time or they're not going back to work as it was pre-COVID. So this is where it's a big opportunity for us to continue to iterate, continue to develop solutions that help people get their work done in this remote distributed environment. And maybe one of the trends that we are seeing is this, call it, rise of freelancers, this rise of folks that are perhaps starting their own new businesses as they've learned or decided in this past year that, hey, maybe it's time to try something on their own. And so that's where we're really leading into our Professional SKU. We continue to see that up 30% year-over-year. Again, HelloSign another great example, where the old way of just pen and paper, someone will walk into your desk, that's really been limited in this past year. And so eSignature continued to take off. And so what that's really what we're doing, is trying to develop tools and capabilities that serve what we see as this future dynamic as far as remote distributed work that all of us are -- have been living this past year and likely the majority of us will be living in the future.

Okay. I guess how do you kind of think about -- I think you touched on some pieces in there, but how do you think about building that in natively into the solution set? Are there kind of other products that could be coming down the pipeline? Or just how do you think about creating a better experience for mobile as part of this?

Well, again, I think this is where we're monitoring all the trends that we're seeing as far as people using the mobile devices, how are people engaging with the product now, certainly seeing sharing taking off. And so we're trying to make that much more easy to utilize. If anybody has the opportunity to play with their Dropbox device, a blue sharing button is really everywhere. And so this is what we're doing. We are trying to see how customers are engaging with us and then make it an easy-to-use experience. And so a lot of our products are centered around this that we've released in this past year, and we are working on other products that we're excited about. We haven't spoken of them yet publicly. They're still in their early stages of development, but there's several others that are making strong progress. But again, this is where we're monitoring the trends in the industry, monitoring trends of our user base and iterating on all of our products to figure out how do we pull these together in the most compelling way for our customers.

Okay. Great. And we'll definitely be looking for some of those new releases coming out and what's in the pipeline here. And thanks again for those online and have been putting their questions in. It's been great so far. Just want to touch a little bit on how you're thinking about the margin, the strong margin performance in Q2. How do you think about kind of the plans to invest in the back half of the year? If you can kind of give a little bit more color here where kind of the biggest focus areas are for your investments.

Sure. So we've made incredible progress on profitability. We actually achieved a record 32% operating margins in Q2, and that's an 11-point improvement over last year. And we raised our full year margin guidance by more than 1 point to 28.5% to 29%. It's about a 7-point improvement relative to last year but certainly very focused on maintaining a healthy balance of revenue growth and profitability. And again, we're seeing several areas of our business doing quite well, and we want to invest in those opportunities. So we certainly plan to invest in these growth areas such as DocSend and HelloSign. And what we're going to do, we're going to add R&D headcount in the back half of this year. And we also have some additional marketing campaigns to drive awareness of both our core Dropbox offerings as well as HelloSign. And we will invest in other organic and inorganic initiatives that do carry a compelling ROI. But maybe lastly, we should still remain very committed to staying on course with our long-term targets of operating margins of 28% to 30% and a free cash flow of $1 billion by 2024.

Okay. No, that's great to hear. And I guess maybe just to touch on there. The impact in 2Q was particularly strong there. I guess anything to kind of call out there for the upside to -- that happened in the quarter?

Yes. So if you think about 32% operating margins we had in the second quarter, key drivers there, obviously, our revenue performance would beat our top line revenue guide by $5 million or so. So that was certainly helpful. The lower headcount base that we're operating under this year, lower facilities costs as we shift to this virtual-first model, which is saving on that front. And so there's many different tailwinds. Maybe one area to call out is attrition. So similar to many other companies, we did see a bit of a spike in attrition in the second quarter, but I think the real strong news is we're also seeing now hiring really pick up. And one of the interesting aspects of that is that's accelerating our shift to lower-cost locations. In the first half of this year, more than half of our hires were outside of San Francisco, Seattle and New York. So attrition did have a bit of an impact on the second quarter, but this is where we are seeing, hey, what's really working in the business and being disciplined and thoughtful about assessing those investments and deciding where we're going to allocate our R&D dollars, where we're going to allocate our marketing dollars. And so we're seeing that hiring pick up, and we're going to invest in that, and that's going to help us hit our longer-term targets.

Okay. No, great to hear. I guess just kind of on that front, you made a shift to being a virtual-first company. How has that been translating so far? And I guess how is that helping your hiring initiatives? It sounds like you are seeing a pickup there. But I guess what kind of impact is that having in terms of the talents that you are able to attract into Dropbox?

Sure. It's really been interesting, I think. So a lot of people are excited about this virtual-first option we have. If I think about some of the recent new hires I have on my own team, our new VP of Finance lives in Philadelphia. Another member of our IR team lives in Texas. A person on the technical accounting side that we just hired is in Ohio. Others are excited to be able to work from Spain if they want to in a given month. So we're finding talent that's really excited by this virtual-first motion that we're going to be experimenting with or working through. And I think we did have this moment of opening up our studios, which is our office footprint. So we are retaining a subset of our office footprint for that group collaboration. And we -- unfortunately, we opened for a month or so. The Delta variant spiked, and so we've had to close the offices until that subsides. So we're still figuring out how does this work from that collaboration in-office studio perspective, but I think from a hiring perspective, we're really finding folks that are excited to be here, excited to work under this virtual first model. And again, this is really also accelerating our shift to these lower-cost locations.

Okay. That's great to hear. It looks like we're running up against the against time here. So Tim, really appreciate you spending time with us today, and glad you could join us for our conference.

Thanks, Steve. Really appreciate it, and thanks, everybody.

Bye.